Sign In
SHARE
Deconstructing Libor
Henri, in my comments yesterday, has a smart way of looking at the TED spread. The TED spread between Treasuries and Libor, he says, is the sum of two other spreads: the Treasuries-OIS spread plus the OIS-Libor spread. OIS stands for "overnight index swap", and it gives a good indication of where interest rates are when there isn't any credit risk.
So if you're worried about interbank credit risk, it makes sense to look at the OIS-Libor spread rather than the TED spread; the Treasuries-OIS spread is more of an indication of how extreme the flight-to-liquidity play is. As Henri says of the OIS-Libor spread:
This is the true "banking liquidity" component of the TED spread, and the only scary bit... It is the nux of the crisis.
So, how's that OIS-Libor spread doing?
The three-month Libor OIS spread, viewed as an indirect measure of funds availability in the money market, widened to 87 basis points from 77 basis points yesterday. It was as narrow as 24 basis points on Jan. 24. The spread peaked last year at 106 basis points on Dec. 4.
Clearly this is a volatile indicator, if it managed to go from 106bp to 24bp in the space of seven weeks. But equally clearly it's high and rising, as Libor ticks up yet again.
Accrued Interest has a good post today on the usefulness of Libor as an indicator: one thing worth remembering is that it's largely a European interbank rate, with only two American banks participating in the fixing. And one way of looking at what's going on is that illiquidity in the US money markets is increasingly spreading globally. Which can't be a good thing.
Loading...
Thank you for registering as a Portfolio.com Insider. Your comment has been added.
Create Your Public Profile
- The Times' Rorshach Geithner Story
- Apr 27 2009 9:26AM EDT
- Sinking Animal Spirits
- Apr 27 2009 8:45AM EDT
- Counter-cyclical Urban Policy
- Apr 26 2009 10:00AM EDT
- Be Your Own Counterfeiter
- Apr 26 2009 9:36AM EDT
- Being Tim Geithner
- Apr 25 2009 12:37PM EDT
- Notes From a Press Conference Naif
- Apr 25 2009 9:41AM EDT
- What Good is the News?
- Apr 25 2009 8:32AM EDT
- Stressful Enough
- Apr 24 2009 2:29PM EDT
- Not Regretting the Pound
- Apr 24 2009 1:09PM EDT
- Introducing the New Ford Squeeze
- Apr 24 2009 9:47AM EDT
- Non-Economic Questions of the Day
- Apr 24 2009 9:12AM EDT
- The Stress Test Blind Alley
- Apr 24 2009 8:36AM EDT
- Happy Hour
- Apr 23 2009 9:40PM EDT
- Recovery Without Rebalancing
- Apr 23 2009 6:13PM EDT
- The Shape of Your Recession
- Apr 23 2009 5:11PM EDT
Archive
Categories
Links
- Email Ryan Avent
- Econospeak
- Financial Crookery
- The Epicurean Dealmaker
- Naked Capitalism
- Alphaville
- Marginal Revolution
- The Panelist
- FP Passport
- Overcoming Bias
- Andrew Leonard
- Barry Ritholtz
- Brad Setser
- Carbon Tax Center
- Calculated Risk
- Greg Mankiw
- Free Exchange
- Dean Baker
- Alexander Campbell
- Kash Mansori
- The Bayesian Heresy
- A Fistful of Euros
- John Quiggin
- Michael Mandel
- Lance Knobel
- Mark Thoma
- Dan Gross
- Curbed
- Streetsblog
- Chris Anderson
- Deal Journal
- MarketBeat
- DealBook
- DealBreaker
- Carl Bialik
- Michelle Leder
- Brad DeLong
- Ultimi Barbarorum
